Emerging Economies - India

18thAnnual North American
Global Employment
Services Conference
November 7-10, 2006

Miami Beach, FL
Emerging Economies:
India
K. R. Sekar
Partner
Deloitte Haskins & Sells, India
November 9, 2006
Agenda
• India economy - Growth and projections
• Foreign Direct Investment - overview

• Tax overview
• Recent amendments in tax laws:
– Finance Act 2006
– SEZ provisions
– FBT provisions
– Electronic filing of corporate tax returns
• Significant rulings
• Service tax - Export of services
3 18th Annual NA IAS Conference in Miami Beach, FL Copyright © 2006 Deloitte Development LLC. All rights reserved.
The Indian Economy – A snapshot
Double digit
growth in next few
• Real GDP growth rate 8.1% years
• Robust growth rate in all sectors

2004-05 2005-06
Agriculture 0.7% 2.3%
Industry 8.6% 9%
Services 9.9% 9.8%
Overall GDP 7.5% 8.1%
• Manufacturing sector: 9.4% growth rate.

• The service sector contributes 54.1% to India’s GDP.
Indian Economy – Projections
World economy projections
GDP 2003 US$
BRIC Report – Highlights:

Largest economies in 2050
• Indian economy – 3rd largest
by 2050
• In less than 40 years the BRIC

economies, together, could be
larger than the G6.
Ja A
SA
R zil
Fr n y
Br n
na
er K
a
ce
ly
pa
I
si
G U
It a
D
a
hi
an
U
us
m
IN
C
Source: BRIC Report by Goldman Sachs

India Economy – Growth factors
Spectacular growth
DETERMINING FACTORS
Largest Abundant talent
democracy pool
Young educated
Information Technology workforce
boom
Improving agriculture – 2nd in Connectivity : 2nd in roadways

Farm output Construction
(Courtesy: World Bank)

6 18 Annual NA IAS Conference in Miami Beach, FL
th Copyright © 2006 Deloitte Development LLC. All rights reserved.
• Key sectors which have performed well -
Manufacturing industry
• Textiles, Food products
• Consumer Goods and durables
• Real estate (construction – development projects)
• Automobiles, Basic metals
• Biotechnology
• Entertainment
• Handicrafts
Services industry
• Telecom services
• Business Process Outsourcing
• Information Technology
• Medical services / Hospitals
• Hospitality services / Tourism
• Financial and accounting services / Investment advisory
services
• Transport – Land, air and water
• Securities / Stock Trading
• Engineering / Technical Consultancy / Banking services
INDIA ECONOMY –
INDIA
REGIONAL
2006
DEMOGRAPHICS
TOURISM
& IT
TEXTILES
FINANCIAL &
BUSINESS
CENTRE IT & EDUCATON
SILICON
STATE
AUTOMOBILE
INDUSTRY
TOURISM
& IT
Foreign Direct Investments
Foreign Direct Investment policy – overview
• FDI - considerably liberalized

Infrastructure development
FDI Objective Creating employment opportunities
Technological up gradation
• FDI prohibited in:

– Retail trade
– Lottery business
– Gambling
– Atomic energy
Sector wise FDI Cap
0%
74%
26%
• Banking – Private sector
• Atomic minerals
• Telecommunication services
z
• Satellites – establishment and

operations
74%
FDI Cap Indian holding
www.dipp.nic.in
Sector wise FDI Cap
49% 0%
• Broadcasting – Cable / DTH /

Setting up hardware facilities.
• Asset reconstruction companies
51% 49%
• Air transport services
• Companies in infrastructure
services sector (except telecom)
www.dipp.nic.in
Sector wise FDI Cap
26%
0%
• Broadcasting – Uplinking a news
& current affairs TV channel 26%
• Defense production
• Insurance
• Publishing of newspaper and z
periodicals dealing with news and

current affairs. 74%
• Petroleum and natural gas –

refining (in case of PSUs)
www.dipp.nic.in
Sector wise FDI Cap
Others:
• 20% - Broadcasting (FM Radio)
• 51% - Single Brand Product Retailing
www.dipp.nic.in
Industry wise FDI Inflow
[05 – 06]
Sectors attracting highest FDI
eu g
s
n
s
rm es ls
p
T S om
et nt
ac sin
rt s
al
m s
io
du
qu
c a
po ce
od he uel
M me
tic
at
P pro ic
ec
In
E
ns rvi
Fo C F
e
el
c
C
ra e
le
T
E
ha
Source: www.dipp.nic.in
FDI – Recent developments
Sl. Particulars Retail Trade Real estate Telecom
1. FDI Cap 51% 100% 74% (composite)
2. Eligible • Single Brand, • townships, • Basic, Cellular,

products /
• Known as • housing, • Unified Access,
activities
such
• built-up
internationally
infrastructure • National /
• Branded International Long
• Construction-
during Distance,
development
manufacture
projects; • V-Sat,
• PMRTS,
• GMPCS, etc.
3. Relevant Press Note 2 Press Note 3 (2006 Press Note 1 & 5 (2006
press notes (2006 series) series) series)
India Income Tax – An
overview
Personal Taxation – Snapshot
Tax rates - FY 2006 - 2007
Slab of income (Rs.) Rate of tax (%)

0 - 100,000 Nil
100,001 – 150,000 10
150,001 – 250,000 20
Above 250,000 30
Surcharge – 10% [if income exceeds Rs. 1,000,000]

Education Cess – 2%
Highest effective rate –
Basic exemption: 33.66%
– Women - Rs. 135,000
– Senior Citizens Rs. 185,000
Corporate Taxation - Snapshot
Class of persons Effective tax rate (%)
Domestic company 33.66
Foreign company 41.82
Dividend Distribution Tax 14.03
Applicable to foreign
• Minimum alternate tax – 10% company branch; ‘PE’
• Key exemptions / deductions:
– Undertakings in free trade zones (FTZ)
– Undertakings in Special Economic Zones (SEZ)
– Hundred percent export oriented undertakings (EOU)
– Income of a Mutual Fund
Corporate tax impact
International transactions
Transfer pricing regulations – Key points
– Transactions between associated enterprises must be at arm’s length

price (ALP).
– ALP based on Most Appropriate Methodology
– Assessees having international transactions with AEs to file
Accountant’s certificate (Form 3CEB)
– TP documentation to be prepared including prescribed data
– TP assessments taken up based on annual parameters set by the tax
authorities
Corporate tax impact
International transactions
Transfer pricing – some current and relevant issues
– Losses of a distributor not acceptable

– Initial setting up costs / losses
– Justification for Management Service payments – benefits to be
highlighted and detailed documentation to be maintained
– Sharing of costs w.r.t. ‘marketing intangibles’
Recent Legislative
Amendments
Finance Act 2006 – Corporate Taxation
• Filing of return of income mandatory for claiming specific tax

exemptions / deductions.
• Rate of Minimum Alternate Tax increased from 7.5% to 10%.
• Removal of exemption to income of an Infrastructure capital fund /
company.
• Interest converted into loan or borrowing or advance does not
amount to payment
• Tax paid outside India and eligible for credit / relief not allowable
as deduction
• All Equity Oriented Funds exempted from payment of DDT
Recent tax amendments
Special Economic Zones (SEZ)

• Zones deemed to be foreign territory for duty purposes.
• Any private/public/joint sector including a foreign company or State
Government or its agencies can set up Special Economic Zone
(SEZ).
• Permitted activities
– Manufacture of goods
– Rendering services
– Free trade and warehousing
• 100% FDI permitted for development of SEZ and for SEZ units.
• Establishment of Offshore banking unit and International Financial
Service Centre allowed in SEZ.
Benefits available to SEZ developer
Tax benefits to SEZ developer

• Tax holiday for any block of 10 years in 15 years
• Tax / duty free import or domestic procurements for development,
operation and maintenance of SEZ
• Exemption from Service Tax/ Central Sales Tax/Value Added Tax
• Specified income from investments in SEZ exempt from tax
Benefits available to SEZ units
Benefits available to SEZ Units:
• 100% FDI (automatic route) in manufacturing sector
• ECB up to $ 500 million a year allowed - no maturity restriction.
• Specific exemptions under Companies Act and FEMA with respect to managerial
remuneration, realization of export proceeds etc.
• Tax benefits:
– Tax holiday for up to 15 years.
– Exemption to capital gains in specific situations
– Exemption from MAT
– Exemption from WHT in certain transactions of offshore Banking Units.
– Exemption from Customs Duty, Central Excise Duty, Service Tax, Value
Added Tax and Central Sales Tax (on raw material procurements).
Fringe Benefit Tax – an overview
The Finance Act 2005 introduced a new levy, namely FBT as

a presumptive tax on the employer
Rationale:
• Inherent difficulty in isolating the personal element
• Expenditure incurred by the employer ostensibly for business
purposes but includes in partial measure, a benefit of a personal
nature
Fringe benefits - Definition
Any consideration for employment provided by way of-

(a) any privilege, service, facility or amenity, directly or indirectly, provided
by an employer, whether by way of reimbursement or otherwise, to his
employees (including former employee or employees);
(b) any free or concessional ticket provided by the employer for private
journeys of his employees or their family members; and
(c) any contribution by the employer to an approved superannuation fund

for employees.
FBT – Overview of Provisions
Applicability and Rate of tax
Fringe benefits provided or deemed to have been provided by an
employer to his employees taxable at 33.66%
Quantum of fringe benefits – % of total expense

Ranges from 5% to 100% depending on:
• Nature of expense
• Industry
Some examples:
– Travel – 20% / 5%
– Employee welfare – 20%
FBT – Categories of expenses
(A) Entertainment (H) Repair, running (including fuel) and
maintenance of motorcars and
(B) Provision of hospitality
depreciation thereon
(C) Conference & expenses related to it
(I) Repair, running (including fuel) and
(excludes participation fee)
maintenance of aircrafts and depreciation
(D) Sales promotion including publicity thereon
(excludes advertisement & other legitimate
(J) Use of telephone other than leased lines
business expenditure)
(K) Maintenance of any accommodation in the
(E) Employee Welfare
nature of guest house other than for
(F) Conveyance, tour and travel incl. foreign training purposes
travel
(L) Festival celebrations
(G) Hotel, Boarding and lodging
(M) Use of Health Club and similar facilities
(N) Any other Club facilities
excludes (O) Gifts, Scholarship
•Expenditure on food or beverages
(P) Free or concessional ticket for private
provided to employees at office or
factory
journeys of employee or family members
•Expenditure on paid vouchers (Q) Contribution to approved superannuation
which are non transferable and fund
usable only at eating joints)
FBT – Overview of Provisions
•Who is liable to pay FBT

– liability to pay FBT is on the employer
– payable, notwithstanding the fact that the employer is not liable to pay
income tax in India.
Exceptions are any fund eligible for exemption u/s 10(23C), or trust or institution
registered u/s 12AA.
•Procedural compliances:
– Return of Fringe Benefits to be filed by 31 October – to be filed
electronically
– Quarterly deposit of fringe benefit tax within prescribed timelines
FBT – Applicability to foreign companies
• A liaison / branch office of a foreign company liable to pay FBT.

• Foreign companies are liable to pay FBT only if:
– it has employees based in India other than for a short duration
– if it has a permanent establishment in India.
• No tax credit available for Fringe benefit tax
• Points to be addressed:
– Determination on the quantum of expense that qualifies as fringe
benefits
– Compliances by the foreign company
RECENT SIGNIFICANT
JUDGEMENTS -
International
taxation
Recent significant judgments
Hiromi Hirose, Japan Broadcasting Corporation (NHK)

[ITAT Delhi]
Issue – Is salary received overseas by a ‘Not ordinarily resident’ subject to

tax in India?
Held - Salary received overseas for period of service rendered outside
India, held taxable.
Ruling significant for

assignees deputed to India who are required to frequently
travel outside India in connection with the assignment.
Ericsson (Sweden), Motorola (USA) and Nokia (Finland)
[ITAT (SB) Delhi]

Issue: Business connection / PE on account of deputation of personnel
Ericsson – Held - There was no ’business connection’ or ‘PE’ in India hence no

income could be liable to be taxed in India
Motorola – Held - There was a ‘business connection’ but not a PE in India and
hence in the absence of PE no income could be liable to be taxed in India
Nokia – Held - There was a PE in India as the Indian subsidiary was a virtual
projection of the Finish company and hence income was attributable to the Indian
PE. As the PE was engaged in networking an planning activities 20% of the income
was attributable to Indian PE.
Ericsson, Motorola, Nokia – Key decisions….
Summary of decisions…
Ericsson Motorola Nokia
•No ‘fixed base PE’ • Employees deputed • Common employee

~ facilities by MUS worked for •Nokia was in
extended by MUS as well as MIL position to control
EFC/ECI to visiting • Employees office NIPL
employees of ERA facilities of MIL •Virtual presence
not sufficient to • Resulted in virtual of Nokia in India
trigger fixed base projection of MUS ~ through NIPL
PE under Article in India through and one common
5(1) MIL, hence PE employee Mr. K
•No Service PE ~ • Exclusions applied •NIPL
employees present as activities constituted PE
in India prior to ‘preparatory’ in in India
signing contracts nature
The Population Council, INC, USA

[AAR – Delhi]
Issue: FBT impact on foreign companies- Does FBT liability exist even if no income tax is
payable by the employer in India?
Held - Liability to pay Fringe Benefits Tax exists even if no income tax is payable by the
employer in India.
Morgan Stanley and Co., Inc., USA (MS USA)

[AAR – Delhi]
Issue: Do Stewardship services and secondment of personnel give rise to a PE in India

Held – MS, USA has “service PE” in India on account of deputation of personnel. Payment of
arm’s length fees by MS USA to the Indian group company extinguishes any tax liability for
MS USA in India
No further attribution of profits arises

provided the PE is compensated at arm’s length.
Western Union Financial Services Inc.

[AAR – Delhi]
Issue: Does Business connection / PE arise when agents appointed in India by
a non resident for money transfer business?
Held - Indian agents appointed by a non resident for its money transfer
business results in a business connection, though not a PE.
Hindalco Industries Ltd.

[Mumbai ITAT]
Issue: Nature of payment to Foreign company – Royalty / Fees for included
services (FIS); Is reimbursement of expense taxable as FIS?
Held - Payments made to a US company to acquire know-how, process
technology and technical assistance are taxable as ‘Royalties’
Reimbursement of expenses taxable as FIS as essentially a part of fees.
Training fees paid for learning to use the know-how is FIS.
Citicorp Trustee Co. Ltd. UK
[AAR]
Issue: Liability to tax on transfer of shares of Indian Company upon reorganisation of the
trustee company
Held - Transfer of shares of an Indian company by a non-resident upon reorganization of
the trustee company does not constitute a “transfer” for the purpose of the Indian Income
Tax Act or the India UK tax treaty.
Oman International Bank SAOG

[Mumbai ITAT]
Issue: Allowability of bad debts
Held - Debts written off as irrecoverable by the taxpayer - sufficient for claiming exemption
and cannot be questioned by the assessing officer.
General Electric Pension Trust
[AAR]
Issue: Nature and taxability of profits of US Pension Trust in India and availability of treaty
benefits to US pension trust
Held – 1) Profits from sale of portfolio investments are in the nature of business income
2) Applicant not taxable in the US; hence not entitled to treaty benefits and taxable in
India on such business income
Headstart Business Solutions

[AAR]
Issue: Whether payment for software purchase liable for WHT
Held – WHT obligation arises on any other sum chargeable under the provisions of the
Act which contemplates amounts, the whole of which is taxable, a mixed composition
which is partly taxable and gross revenue receipts; Hence software purchase subject to
WHT
PanAmSat International Systems Inc., USA

[ITAT-Delhi]
Issue: Taxability of use of transponder capacity

Held - Payment for use of the capacity of the transponder is not royalty as the same
would not amount to use of the transponder itself. Payments made by broadcasters to
PanAmSat for transmission of programs not liable to tax in India.
Service tax –
Export of services
Export of Services
Key factors
• Payment of service tax is exempted on service
exported out of India;
• Determination of export is based on the category
• 97 taxable services divided into three categories
Category I – Based on immovable property
– Exempt if the immovable property is situated outside India
– Services such as construction services, interior decorator’s
service fall under this category
Export of Services
Category II – Based on performance of service
– Exempt if performed either fully or partly, outside India
– Services such as Chartered Accountants, Maintenance
service, Technical testing & Analysis, etc., fall in this category
Category III – Based on location of recipient

– Exempt if Recipient located outside India
– If such recipient has any commercial establishment or any
office in India, an additional condition applies
– Service such as business auxiliary service, Intellectual
Property, Business Support services, Management
Consultancy, etc., fall in this category
Export of Services
Additional conditions for exemption
– for all the above categories
• Services must be delivered and used outside India
• Consideration to be received in foreign exchange
Copyright © 2006 Deloitte Development LLC. All rights reserved.

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18thAnnual North American

November 7-10, 2006

• India economy - Growth and projections

• Foreign Direct Investment - overview

• Robust growth rate in all sectors

• Manufacturing sector: 9.4% growth rate.

BRIC Report – Highlights:

• In less than 40 years the BRIC

Source: BRIC Report by Goldman Sachs

Improving agriculture – 2nd in Connectivity : 2nd in roadways

(Courtesy: World Bank)

• FDI - considerably liberalized

FDI Objective Creating employment opportunities

• FDI prohibited in:

• Satellites – establishment and

FDI Cap Indian holding

• Broadcasting – Cable / DTH /

FDI Cap Indian holding

periodicals dealing with news and

• Petroleum and natural gas –

• 20% - Broadcasting (FM Radio)

• 51% - Single Brand Product Retailing

Sectors attracting highest FDI

1. FDI Cap 51% 100% 74% (composite)

2. Eligible • Single Brand, • townships, • Basic, Cellular,

Tax rates - FY 2006 - 2007

Slab of income (Rs.) Rate of tax (%)

Surcharge – 10% [if income exceeds Rs. 1,000,000]

Transfer pricing regulations – Key points

– Transactions between associated enterprises must be at arm’s length

Transfer pricing – some current and relevant issues

– Losses of a distributor not acceptable

• Filing of return of income mandatory for claiming specific tax

Special Economic Zones (SEZ)

Tax benefits to SEZ developer

The Finance Act 2005 introduced a new levy, namely FBT as

Any consideration for employment provided by way of-

(c) any contribution by the employer to an approved superannuation fund

Quantum of fringe benefits – % of total expense

•Who is liable to pay FBT

• A liaison / branch office of a foreign company liable to pay FBT.

• No tax credit available for Fringe benefit tax

Hiromi Hirose, Japan Broadcasting Corporation (NHK)

Issue – Is salary received overseas by a ‘Not ordinarily resident’ subject to

Ruling significant for

Ericsson (Sweden), Motorola (USA) and Nokia (Finland)

[ITAT (SB) Delhi]

Ericsson – Held - There was no ’business connection’ or ‘PE’ in India hence no

•No ‘fixed base PE’ • Employees deputed • Common employee

The Population Council, INC, USA

Morgan Stanley and Co., Inc., USA (MS USA)

Issue: Do Stewardship services and secondment of personnel give rise to a PE in India

No further attribution of profits arises

Western Union Financial Services Inc.

Hindalco Industries Ltd.

Oman International Bank SAOG

Headstart Business Solutions

PanAmSat International Systems Inc., USA

Issue: Taxability of use of transponder capacity

Category III – Based on location of recipient

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